Equities yield to bond market breakout

Equities yield to bond market breakout

Mike van Dulken & Henry Croft at Accendo Markets commented to clients this morning:

FTSE 100 Index called to open -45pts at 7625, back from an overnight test of 7600 that followed a sharp pullback from 7700 yesterday. Bulls need a break above 7635 for encouragement in a rebound towards 7700. Bears require a breach of 7615, if not another test of 7600, to inspire hope of further downside. Bullish 7635, Bearish 7615

Calls for a negative start can be pinned on read-across from negative sessions in the both the US and Asia overnight. This derives from global bond yields continuing to rally (prices falling), increasing their relative attractiveness versus what many consider overvalued equities, stoking fear of a market reversal in the two asset classes following a 30-year bull market in the former and a Trump-inspired climb for the latter. Bond market action buoyed the US dollar, lifting the greenback from last week’s 3-year lows to the detriment of commodities, with Miners in Australia lower overnight, whilst oil benchmarks continue their retreat from last week’s fresh 3-year peaks to hamper Energy. The USD move has however dampened the hindrance of recent GBP and EUR strength.

UK corporate news this morning: Anglo American says De Beers rough diamond sales of $665m in cycle 1 2018, +46% sequentially on robust US holiday demand and seasonal re-stocking. British Land Q3 dividend 7.52p (1.1% yield), +3% vs last year. Informa expects FY17 results in line with expectations outlined within November trading statement. Informa + UBM boards recommend 65%.5/34.5% merger, with UBM paid 971p (29.9% premium) via 163p cash + 1.083 new shares. Ryanair: BALPA to be sole representative body for 600 UK pilots in labour pact with airline.

Domino’s Pizza expects FY17 adj. pre-tax profits slightly above consensus after strong Q4. CYBG Q4 mortgage growth +7.4%, SME +1.4%, deposits +14.8%; economic outlook uncertain but confident in 2018 guidance. Entertainment One completes £53m share placing at 305p. PZ Cussons H1 pre-tax profits +37% (adjusted -15%) amid tough UK trading; maintains dividend. Greencore anticipates strong FY18 growth; more GBP/USD strength would impact US profits.

In overnight US trading, equity markets saw their biggest one-day fall of the year, retreating from Friday’s record highs as concerns about rising interest rates amid a US treasury yield rally weighed. The Dow Jones dropped over 175 points as the 10-year treasury yield touched a 3.5-year high, with Caterpillar, Apple and Chevron underperforming, while rate sensitive utilities, telecommunications and real estate sectors weighed on the S&P 500. The Tech-focused Nasdaq closed 0.5% lower. Note, US companies reporting today include Dow components McDonald’s and Pfizer , as well as Corning and Harley Davidson, all before the market open.

Crude Oil benchmarks have extended their retreat from Thursday’s 3-year highs, falling alongside a rising US dollar. Global benchmark Brent has been the most affected, breaking back below $70 and briefly dipping below $69 a barrel, while its US equivalent, despite dropping below $65, has found tentative support just below at $64.8.  Gold has continued to fall as the US dollar extends its rebound from last week’s fresh 3-year low, with the precious metal dropping to a 1-week low. Falling highs from $1366 have hindered any recovery for the commodity, despite the US dollar finding resistance, as investors weigh the opportunity cost of holding the non-yielding asset in a rising interest rate environment.

In focus today will be UK Consumer Credit (9.30am) which is expected to pull back a little in December following three months around £1.4bn. UK December Mortgage Approvals, however, are forecast to post a second month of improvement (66K vs 65.1K prev) from October’s 12-month low, suggesting resilience in homebuyer appetite and thus UK consumer confidence. Eurozone Q4 GDP (10am) is anticipated steady at a 0.6% quarterly clip, just shy of Q2’s best since Q1’15. Annually, however, consensus has pencilled in growth of 2.7%, continuing a Q4’16 ascent and not far from regaining Q1’11’s prior peak. Strong prints could benefit the single currency EUR which in turn may penalise the German DAX. Eurozone Confidence is forecast largely unchanged.

This afternoon may see preliminary German Consumer Price Inflation (CPI; 1pm) negative in January (-0.5% vs 0.6% Dec), reversing some of the strong November and December bounce. That said, the 12-month pace of price growth may in fact prove unchanged at 1.7%, holding just shy of 2017’s highs of 1.8% and below the ECB’s 2% target. As mentioned above with GDP, strong prints could benefit the single currency EUR and penalise the German DAX. US S&P November House Prices (2pm) may also come in slightly slower on a monthly basis (0.6% vs 0.7% prev) but hold a steady 6.35% annually whilst Consumer Confidence (3pm) cedes a little ground in Jan. Both could impact USD with a knock-on for EUR and GBP, and thus German and UK equities.

Speakers today include Bank of England Governor Carney (3.30pm) who is sure to be grilled by the UK House of Lords’ committee regarding the central bank’s pessimistic economic forecasts and the threat of Brexit. The ECB’s Mersch (4.30pm) lectures on Monetary and Financial Stability. Results can be expected from Corning, Harley Davidson, McDonalds and Pfizer, while overnight President Trump will deliver his first official State of the Union address. The tone has lost of potential to sway market sentiment, be it highly protectionist/open for business or on the defensive/self-congratulatory. Note expectations that Trump uses this platform to launch his $1tn infrastructure spending plan, a key economic pillar of his presidential campaign alongside recently agreed tax cuts.

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Accendo Markets

Accendo Markets is an online trading services provider, offering CFDs, spread betting and forex to retail (private) clients. Accendo Markets was established in 2007 and has since gone on to win various awards including ‘2018 Winner of Best CFD provider’ at City of London Wealth Management awards and 2017 & 2018 Best CFD Research Service in ADVFN’s International Financial Awards Accendo Markets Ltd. is authorised and regulated by the Financial Conduct Authority (FCA). For more information, visit www.accendomarkets.com